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Trinity Industries Inc (NYSE:TRN)
Q2 2019 Earnings Call
Jul 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the Second Quarter of 2019 Results Conference call. [Operator Instructions].

Today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and include statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are historic are -- not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of business issues and risks. A change of which could cause actual results or outcomes to differ materially from those expressed in these forward-looking statements.

I will be standing by if you should need any assistance, and it is my pleasure to turn today's conference over to Jessica Greiner, Vice President of Investor Relations and Communications.

Jessica L. Greiner -- Vice President of Investor Relations & Communications

Thank you, David. Good morning everyone and thank you for joining us today. I'm Jessica Greiner, Vice President of Investor Relations and Communications. We welcome you to Trinity Industries second quarter 2019 financial results conference call. We will begin our earnings conference call with our prepared remarks from Tim Wallace, Chief Executive Officer and President; followed by Eric Marchetto, Senior Vice President and Group President at TrinityRail; Melendy Lovett, Senior Vice President and Chief Financial Officer will provide the financial highlights and outlook.

Following the prepared remarks from the leadership team, we will move to a Q&A session. Brian Madison, President at Trinity Leasing and Management Services; and Paul Mauer, President of TrinityRail Products are also in the room with us today and will be a part of the Q&A session. Sarah Teachout, Senior Vice President and Chief Legal Officer; and Steve McDowell, Vice President and Chief Accounting Officer are also in the room with us today.

It's now my pleasure to turn the call over to Tim.

Timothy R. Wallace -- Chief Executive Officer and President

Thank you, Jessica and good morning everyone. I'm pleased with our progress this year. We have a great organization and a strong leadership team that is highly motivated to create value for our customers and our stockholders. I have a high degree of confidence in our Company's ability to generate positive results, improve our Company and grow our platform. In a few minutes, Eric and Melendy will provide comments about the second quarter results. I will use my time today to discuss some points about TrinityRail.

A number of business to business industries are in the process of being transformed through optimization initiatives. These transformations are driven by companies with products and services that help their customers operate more efficiently. Product enhancements and technology applications are helping B2B companies optimize their business functions. Over the years the railroad industry has implemented productivity improvements to enhance rail transportation.

Today many of the railroads are implementing precision scheduled railroading, known as PSR. This initiative is designed to make railroads more efficient and cost effective. We see opportunities to optimize additional aspects of the Rail transportation system, specifically the ownership and usage of railcars. We have identified product features that have potential to increase customers productivity. We are also assessing different technology applications that could streamline the ownership and usage of railcars. We are pursuing value propositions that can be converted into profitable business models. We will report more on this in the future.

Our vision for TrinityRail is to be the premier provider of railcar products and services in North America, while generating high quality earnings and returns for shareholders. We want to be the go to source for companies that rely on railcars to transport both freight. We deliver value to our customers and our shareholders through TrinityRail's integrated platform of railcar products and services. Premier products and services provide the core foundation of our integrated platform. Our products and services are designed to streamline railcar ownership as well as enhance the ability of our customers to load, transport and unload railcars efficiently. I'm going to provide some comments pertaining to the value generated by our integrated platform business model. Every company chooses the business model that works best for them. Over the years we have evaluated the benefits associated with our integrated business model, and we have always arrived at the same conclusion. Our integrated platform provides a large number of tangible and intangible benefits for our customers, our Company and our shareholders.

From a big picture standpoint, all of the businesses within our platform work synergistically to meet our customers' needs and create shareholder value. From a financial point of view, we value the tax attributes that our leasing business provides. During strong economic cycles, we definitely value the increased earnings, our manufacturing businesses delivered.

The recurring revenues from our leasing and management services businesses player are a big plus because they occur throughout the demand cycles. When we originate leases and renew leases, our customers commit to provide lease payments throughout the term of the lease. At the end of the second quarter, we had $2.6 billion of future committed lease revenues included in our railcar leases. These revenues will be generated over the life of the leases. Each lease we originate and/or renew increases our recurring revenue pool. Recurring revenue and profit streams help mitigate the effects of cyclical downturns associated with the railcar economy.

Several manufacturing companies thrive on receiving performance feedback from their customers for product improvement purposes. Leasing connects our manufacturing businesses with the life cycle of our railcars providing a conduit feedback about the performance of our products. We use this information to improve our services and develop new product features that make our railcars more productive. Railcars within our lease fleet had the potential to provide a large amount of data and information for us. I believe this is a key differentiator for our Company. In addition, the companies in our integrated platform specialized in designing, manufacturing, modifying and maintaining railcars. Our leasing business has unlimited and direct access to all these resources, plus a great visibility of the entire supply chain, and a reliable source of low cost premier railcars.

Frequently our customer's request quotes for both lease and sales pricing. Our integrated platform provides us the flexibility to respond to both request. We never want to miss out over opportunity to provide products and services to our customers.

In summary, we believe our integrated platform works well for us. Doing business with our platform is like being a member of a club, our customers have access to TrinityRail's expertise as well as a wide range of premier products and services. We have proven the value of our integrated platform over the past 40 years and continue to perfect it. Our platform differentiates Trinity Rail in the marketplace today is designed to generate substantial benefits for our shareholders and is a great vehicle to carry us into the future.

As I stated earlier we have a highly capable team that is excited about the opportunities for our Company. I'm very confident in their ability to convert these opportunities into value for our customers and our shareholders. In my experience when we set our minds on accomplishing something we deliver.

Now, I'll turn it over to Eric, who will comment on our operations and commercial market.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Thank you, Tim, and good morning everyone. TrinityRail's second quarter financial performance reflects the unique value of our rail platform producing significant recurring revenues from our growing lease fleet while profiting from a healthy level of new railcar production and maintenance and compliance activities. Our rail platform of products and services is a differentiator and fundamental to providing value to our customers and other stakeholders. Our family of products available through our lease fleet and our manufacturing footprint insurers Trinity can deliver the right product when our customers need it. Quickly adjusting to demand as market conditions evolve. Our owned and managed lease fleet is now 124,650 railcars at the end of the second quarter. Our ability to leverage the views and service opportunities we gain from a larger and more diverse fleet continues to expand. We are adding over $565 million in new railcars to the lease fleet in the remainder of 2019. We expect our lease backlog all with commitments from customers to earn unlevered returns well in excess of our cost of capital. This will bring investment of our lease fleet to over $8 billion. Our fleet is young with an average age of 9 years. We have a customer base of over 700 shippers serving diverse markets with $2.6 billion of future committed lease payments. The fleet average monthly lease rate has been improving sequentially in 2019. We expect a modest sequential improvements in pricing to continue in the second half of 2019. and compare favorably year-over-year by end of the year.Our team has been very successful renewing and assigning leases to maintain a high level of utilization, and I'm very pleased with the service levels, the Trinity Rail teams continue to deliver which is differentiating our business.

During the second quarter our railcar manufacturing business increased railcar deliveries by 17% sequentially following a change in the mix of railcars from earlier in the year.

Our manufacturing platform is scalable and flexible and our operations team does an incredible job ensuring our footprint is appropriately sized for the market environment. The segment margin of 9.5% during the quarter, reflected higher volume, better efficiencies and also bit benefited from better average pricing on railcars delivered. We recently announced the geographic expansion of our railcar maintenance business during the second quarter with a new [Indecipherable] facility. We expect this investment will increase our ability to service the maintenance requirements of approximately 50% of our lease fleet. Meeting and another one of our strategic priorities we discussed at our Investor Day in 2018.

By increase our capacity to maintain our railcars, we expect to increase our service level to our customers. While earning a very attractive return on this growing part of our platform. Managing the maintenance and compliance of our lease fleet will also enhance the productivity of our railcars.

Our experience internally servicing our own railcar maintenance requirements has led to reduce turn times of approximately 40% for maintenance events compared to third-party providers. On the commercial front macroeconomic headlines have hindered the railcar markets demand momentum at various times so far this year. Declining railcar loadings due to weather global trade and inventory pull forward at the end of last year. As well as customer uncertainty for GDP growth rates hesitancy. A challenge in railcar equipment planning.

It seems just as clarity has recently as emerged recently, new information or public comments re-inject uncertainty in the key business planning decisions .Despite this opaque market, our commercial activity is expanding new and existing railcars as well as secondary market transactions total 9,900 railcars in the second quarter. As an integrated railcar provider, it is our first priority to protect the utilization of our lease fleet and the residual value of 50 year asset. As a result Trinity Rail received orders for 2,100 new railcars. We're not surprised by our share of new railcar orders. There are a few larger transactions and new railcar market that not fit well either because of low lease rates unacceptable economics or contract terms and crude oil markets. Simply put, they did not meet our criteria and we held firm. Over the last several years TrinityRail has worked perfectly to harness the power of its rail platform with the goal of providing an unparalleled customer experience through superior service and innovative solutions.

Rail is the most efficient land based mode of transportation. However, there are service gaps in the railroad industry. Our focus is to optimize the ownership and usage of railcars to make rail transportation more economically attractive and compelling. We believe this is key for the long-term success of the rail transportation industry. And is the guiding principle for our strategic business objectives. As a leading provider of railcar products and services, TrinityRail is focused on building our platform of products and services to address the complete spectrum of the rail transportation needs for industrial shippers. Railcars carry commodities. Our railcars and services are not commodities yet the industry tends to compete on price. Trinity Rail is moving towards a differentiated value proposition. Whether it is a service differentiation or product differentiation and we are seeing the financial benefit of our rail platform through our pricing and our ability to integrate new services with our traditional product offering. This business strategy will grow our existing base of recurring revenue from long-term leases and they had high margin services revenue that enhance our return metrics.

As Tim mentioned, our vision is to be the premier provider of railcar products and services. Trinity will continue to build on this foundation of market leadership, innovation and quality that has enabled us to serve our customers in the rail industry for more than 50 years. The Rail Transportation ecosphere is extensive with over 1.7 million railcars that gives us incredible room to grow. Trinity's integrated platform is in a strong position to capitalize on the evolving rail transportation landscape and create substantial value for our shareholders.

We are built to the liver [Phonetic]. I will now turn it over to Melendy.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Thank you, Eric, and good morning everyone. I'd like to start by reviewing the financial highlights for the second quarter. Yesterday following market close, the Company reported second quarter revenues and earnings per share from continuing operations of $736 million and $0.29 respectively.

The year-over-year improvement in our second quarter revenue and operating profit was primarily due to stronger pricing in our railcar deliveries, as well as a more favorable product mix, higher sales of railcars from our lease fleet and lease fleet growth. Lower year-over-year corporate related expenses of approximately $10 million resulted from our cost optimization efforts. Operating profit improvements were partially offset by profit eliminations of $42 million resulting from the investment in newly manufactured railcars from our lease fleet. This is an increase of $17 million year-over-year. Our net interest expense increased by approximately $15 million year-over-year, reflecting the additional leverage on our balance sheet as part of our efforts to optimize our capital structure. All in all, the company delivered solid financial performance for the quarter.

Regarding litigation progress we're pleased that we've reached an agreement to settle the shareholder class action lawsuit for $7.5 million of which our insurance will pay $5 million. The settlement is subject to final documentation and court approval this case was filed after the jury verdict in the Harman federal False Claims Act lawsuit, which the 5th Circuit later reversed in the company's favor .While the company denies the allegations in the shareholder lawsuit. We're pleased to put this matter behind us. For additional information regarding this case and the company's litigation, please see Note 14 to the financial statements in the company's Form 10-Q, which will be filed today.

Moving into guidance in yesterday's press release Trinity reiterated annual earnings per share guidance from continuing operations of $1.15 to $1.35 for 2019, resulting in growth of 64% to 93% year-over-year . We continue to expect segment profit from continuing operations to increase throughout the year as we add railcars to our lease fleet and ramp up railcar deliveries. At the consolidated level, our operating profit eliminations from sales to leasing will also move up as we add Cars to the lease fleet. While our earnings guidance for the company did not change there were slight adjustments to the business and the corporate forecast. We've revised our revenue expectations for the Railcar Leasing and Management Services Group, as a result of timing of railcar deliveries to the lease fleet and it is expected to be between $760 million and $775 million for the year.

We are holding our operating profit guidance for this segment in a range of $320 to $330 million for the year due to improving operating expenses.

Regarding railcar sales from the lease fleet, our expectations for proceeds from sales of leased railcars to our railcar investment vehicle partners in the secondary market remains at approximately $350 million. The timing of railcar sales from the lease fleet is always difficult to predict, but we expect the back half of the year to be relatively even between the third and the fourth quarters. Our margin on railcar sales year-to-date reflects the younger maturity on the railcar assets sold from our lease fleet.

As a reminder, we have sales type leases in our earnings guidance, which are required to be accounted for as sales from the lease fleet in accordance with accounting rules. We expect this to add an additional $160 million in car sale revenue for the year with $34 million of this revenue being recognized year-to-date in 2019. The gain on sales from the lease fleet fleet will be attributed to total leasing segment profit and our EPS guidance range incorporates our assumptions.

Moving to the Rail Products Group, we are revising our railcar delivery guidance range to 23,000 to 24,500 railcars for 2019 as our production schedule has solidified for the balance of the year. The adjustment is a combination of affirming customer requirements and a higher product mix requiring specialty linings. Rail Products Group revenue is now expected to be $3 billion to $3.2 billion, and we're maintaining our profit margin expectation of 9% to 9.5%. We expect our year-to-date, margins to be relatively consistent throughout the remainder of the year.

Our business in corporate teams continue to work collaboratively to identify cost saving opportunities and right-size corporate costs. As a reminder, our corporate expenses include transition and stranded costs related to the spin-off and separation of Arcosa. Additionally, our legal team has made good progress in reducing Highway related cases following the favorable Supreme Court ruling. As a result, we have again lowered our corporate expense guidance range to $105 million to $115 million. We're maintaining our guidance for revenue and profit eliminations of $1.5 billion and $175 million respectively. As a reminder, the revenue and profit associated with these transactions reflect the market-based transfer pricing for inter-company transactions between our railcar leasing and products business segments, primarily for newly manufactured railcars.

Regarding our lease fleet investment, we now expect total net lease fleet investment of $0.9 billion to $1.1 billion for 2019 with fewer railcar deliveries and secondary market purchases planned. In addition to our planned leasing capital expenditures, our manufacturing and corporate capital expenditures forecast is revised to $120 million $140 million. The increase is primarily driven by capital plan for the new Midwest railcar maintenance facility. Regarding progress on our 2019 financial goals, as a newly focused rail products and services company, we've shared with you specific goals and objectives to improve our earnings and returns and unlock shareholder value. Our financial priorities include reducing Trinity's cost of capital through a more optimized balance sheet, using a disciplined capital allocation framework to deploy capital to high return accretive business investments, and delivering meaningful and steady return of capital to shareholders. Our operational priorities include scaling the lease fleet with discretion and utilizing a disciplined packs and capital efficient approach to fund our growth. Growing our maintenance services business to improve service level and and reduce fleet maintenance costs, and aligning our overall corporate costs to Trinity's go-forward business needs. Since the spin-off and continuing through the second quarter, we've made good progress against these priorities.

Financially, we completed the previously disclosed $528 million rail asset backed securitization with a coupon rate of 3.82%. When combined with our short-term borrowings on our leasing warehouse, the loan to value of our wholly owned lease fleet is at approximately 53% at the end of the second quarter. We continue to expect a loan to value range on the fleet of 57% to 59% by year end. Optimizing our capital structure has our weighted average cost of capital at approximately 6.5% today. We made a number of investments during the quarter, including a net lease fleet investment of $157 million and $23 million in capital expenditures for our manufacturing platform. Trinity also completed $44 million of share repurchases, bringing our year-to-date total to $133 million. At the end of the second quarter, we had a remaining authorization of $297 million for a maximum of 10.7 million shares. Specific to our operational priorities and as Eric mentioned, the new Midwest maintenance facility will increase our capacity to internally service approximately 50% of the maintenance requirements of our owned and managed fleet. We anticipate the new facility will be operational by the end of 2020 and will be accretive to consolidated financial results by the end of 2021, including anticipated startup costs.

All of these accomplishments and our investments in the second quarter are aligned with management's near-term goal to deliver 2019 earnings growth and to improve our pre-tax return on equity to an initial target range of between 11% and 13% by year-end 2021. We're confident in our team's ability to execute our plans to meet these goals.

In closing, you've heard from Tim and Eric about the commercial and operational advantages of Trinity's integrated rail platform and how we're positioned to leverage the platform for growth and improved financial performance. Going forward, we'll be highlighting the financial advantages of the platform including stable recurring revenues, strong free cash flow generation, a valuable commercial channel for organic growth, cost advantaged railcar equipment sourcing, and tax-advantaged lease fleet investment. These combined financial advantages of the integrated rail platform enables Trinity to meaningfully invest in high return growth opportunities, including our lease fleet while also returning substantial capital to shareholders.

We'll now transition into the Q&A session. Operator, will you please give our listeners the instructions?

Questions and Answers:

 

Operator

[Operator Instructions] And we will take our first question from Matt Elkott with Cowen. Please go ahead, your line is open.

Matthew Elkott -- Cowen -- Analyst

Good morning, thanks for taking my question. I have a question on the transactions that you guys said you chose not to participate in the quarter. I was wondering if this is specific to this order or if it's reflective of a change in philosophy, maybe or strategy on what kind of orders to target and what to focus on strategically for the business.

Timothy R. Wallace -- Chief Executive Officer and President

Eric?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Hey, Matt, it's Eric, I'll take that. So I'm not sure it's a change in strategy. I think we've always been deliberate about what we've done and especially when it comes to originating leases. There were a few transactions in the market where we were -- where there were shorter lease terms that the perspective, let's see, wanted to acquire significant number of crude oil tank cars and when we looked at our fleet and the residual exposure in the threat of pipelines, we chose not to not to do that. And so that's one case that I'm looking at. There are other -- that's not the only transaction that was in the market, but we are being very deliberate about what we put in our fleet and what markets we go after. As we mentioned, we have very good visibility of our production backlog, and therefore we don't feel -- we feel very confident in picking our spots in the right returns, picking our right deals [Indecipherable] business.

Matthew Elkott -- Cowen -- Analyst

And as you guys focus on growing the lease fleet. I know historically you've had about 40% of the manufacturing backlog. Do you care about maintaining that percentage or if you can grow the lease fleet through in the secondary market. Does that number mean anything to you guys, maintaining that share of the backlog?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Sure Matt, it's is Eric again. We've always said we don't run our business on market share that has not changed. As we compete for business as I mentioned in my comments, we're going -- we want to differentiate our products and our services. We want to create -- we believe our products are better than the others. We don't believe our products are commodities, and our services are commodities. And we keep pushing and talking to our customers about that and we're confident that our customers will see the value in that and that will be successful.

If that means 40% of the market or some other share it will fall, there will be an outcome of what we do. Tim, you answer?

Timothy R. Wallace -- Chief Executive Officer and President

Yes, this is Tim. I'll add that we also don't really focus on the percentage of cars that are going to come out of our manufacturing that we're going to go to leasing that's just a mathematical equation. We're more interested in the quality of the cars when we're looking at our leasing business. We look at it that we're investing in markets and industries and companies that participate and those markets in the industries, and sometimes we make a decision based on the market. Sometimes we make a decision on what's happening in that industry. And sometimes we make a decision on a particular company that's involved there, and then it gets down to the diversification of our fleet and the amount of investment we want to have in these market's industries and Company.

Matthew Elkott -- Cowen -- Analyst

That's very helpful. And just one last question. Tim, you mentioned in your prepared remarks something about product features as it relates to PSR and I was wondering if you see a more compelling need to invest more in R&D for new railcar designs as a way of kind of countering the impact of PSR and giving the users of that given the railroads in the shippers a reason to replace some of the existing existing railcars. Whether it's higher capacity cars are lighter cars more interchangeable cars. So I was wondering if within PSR we could have some opportunities for new innovative product designs that could help with equipment demand?

Timothy R. Wallace -- Chief Executive Officer and President

Yes. I mentioned PSR as an example of productivity improvement enhancements that's occurring in the rail transportation industry, as far as our product features in our product development goes it's really not related to PSR. It's related to information that we receive on the performance of our products and information we receive from customers , and our commercial people are actively involved with their customers looking for opportunities that we can develop features, this going to make our customers more productive in their business. And that's the real key in the business to business transactions of being able to bring features that optimize the customers use of the product. And our Products Group has a number of different initiatives on the drawing board and they have some prototypes out running. And then we even have some new cars out there.

Eric, tell them a little bit about the auto rack and what we've done in that area.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Sure, Matt. This is Eric. We introduced a new product earlier this year, serving the auto industry and it was a new autorack that we call it the hourglass autorack and in that rack we think it's very innovative, it's gotten very good response from the auto manufacturers and the Class ones and it's a proprietary product for us. And in that it gives more room for people to load and unload the cars. And so we think it was a creative innovative products that the industry is responding very well too.

Timothy R. Wallace -- Chief Executive Officer and President

It came from feedback.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

It came from talking to our customers and be announced in our field service team, and in the market and identifying challenges that impede the efficiency of rail transportation and we saw problems. And that's really, when we talk about product development, it's about bringing efficiency to the Rail market which always doesn't go hand in hand but we want we think there's opportunities to bring more efficiency, the rail industry that will then allow the rail industry to capture more mobile share.

Timothy R. Wallace -- Chief Executive Officer and President

And we've received orders for that product in the form of leases that we have. So we're introducing that railcar into through our leasing company, and then that gives us great feedback, like I said , on the use of the railcar. And that's important to us when we come up with new design features that we stay connected to the product. So we can work out any little problems that might be there, or we can add enhancements on the next generation.

Matthew Elkott -- Cowen -- Analyst

That's great, thank you very much.

Operator

We'll take our next question from Justin Long with Stephens. Please go ahead, your line is open.

Justin Long -- Stephens -- Analyst

Thanks and good morning. So to start, I wanted to ask about the new ROE target to see if there is any additional color you could provide around the assumptions behind that path to 11% to 13%. Is that assuming a normalized industry railcar build rate and normalized gain on gains on sale, and could you just talk about what you view as the key items that should drive that improvement in the ROE as well?

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Good morning, Justin. It's Melendy. Let me first talk you through our considerations in setting the 11% to 13% pretax ROE target and that is a goal --our goal by the end of 2021. So what we did is we evaluated our own historical ROE performance as post-spin Trinity and we also looked at competitors performance on those measures as well. We modeled several different scenarios to validate that the goal is a stretch goal for us, but it's also achievable and our current cost of equity, which is around 10.5% was also a consideration. So as far as more specifics around industry deliveries and other detailed assumptions of our scenarios we weren't planning to go into the details around those but I can tell you that based on our 2019 guidance, we expect our progress this year to be around, we expect to be at around 9.5% pretax ROE by the end of the year. And once we get to the end of 2021 and see how we perform versus that 11% to 13% near-term goal we will continue to set our goals to improve beyond that date.

Justin Long -- Stephens -- Analyst

Okay, that's helpful. And then secondly I wanted to see if there is any color you could provide on the quarterly cadence of railcar deliveries as we look into the back half of the year and also would love to get your view on mix and you noted that it was favorable in the quarter. But looking into the back half in 2020. Do you think car type mix gets better or worse versus where we are today?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Hey, Justin, this is Eric. We talked about a step up in our rate of delivery in the back half of 29% to 2020, 2019 of about 30% -- 35%. And that will -- obviously we can't just flip a switch in the instantly do that so that will, that will continue throughout the second half of 2019. In terms of mix and favorable mix and things like that when you look at the industry backlog and where, where we're seeing demand. I think that's still a very favorable mix for us as it's it's generally a tank car product mix and a lot of especially freight cars. So from a mix standpoint based on the industry backlog and where we're seeing inquiries we expect that to continue into 2020.

Justin Long -- Stephens -- Analyst

Okay, great. I'll leave it at that. Thanks for the time.

Operator

We'll take our next question from Bascome Majors with Susquehanna. Please go ahead, your line is open.

Bascome Majors -- Susquehanna -- Analyst

Yes, good morning. If you do the math on the backlog in this as of June in the second half delivery guidance, it looks like there's 9,000 give or take a few hundred cars in the backlog today for delivery in 2020 and beyond. Can you give us a sort of directional look about how much of that is slated for 2020 and what's the multi-years that might go beyond that.

Timothy R. Wallace -- Chief Executive Officer and President

Eric.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

So Bascome you're asking about the backlog in, how much of that is be in 2020 and beyond?

Bascome Majors -- Susquehanna -- Analyst

How much more to you have into the 2020 delivery schedule based on the backlog you reported as of June?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Okay. So we have good visibility. I think with our backlog it will, it continues obviously sequentially quarter-over-quarter, and it would -- with the firm commitments that would have would decline throughout. There is a multi-year order in our backlog that runs further than that, but that's relatively small compared to the size of our backlog. So I would consider most of our backlog delivering either in 2019 or 2020.

Bascome Majors -- Susquehanna -- Analyst

Okay. And I mean with the order environment creating some opportunities that you felt, we're in a great fit for Trinity. How are you managing production capacity to protect margins and what looks like at some point in 2020, whether it be mid-year later in the year. The market could potentially see a downturn in orders to improved pretty dramatically.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

So I mean, obviously, yes, we are managing our production footprint. We believe it is very flexible footprint and we will -- that's kind of the nature of the rail manufacturing business, you're always -- you always have a point in the future where you don't have -- where you're have an inflection points. And the good news is we're seeing inquiry levels that are still very healthy, and that there are car types that fit our production plan. And so I think that's further out, than it is near term.

Bascome Majors -- Susquehanna -- Analyst

Okay. So it sounds like we shouldn't just extrapolate the order total we saw this quarter. I think that's where the market is, it should stay.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

As I've said, this is Eric again. As I've said in previous conference calls, orders are lumpy. There was a lot of uncertainty this quarter that we think cause pauses. Whether it'd be global trade tariffs, the threat of tariffs on Mexico, interest rates everything everything in between. So all of those things cause people to pause on decisions. We still like the inquiry levels, GDP looks like it will continue to be favorable. Railcar loadings, we expect to start to improve all of that should bode well for demand.

Bascome Majors -- Susquehanna -- Analyst

Thank you very much on that, Eric. And Melendy, I want to follow up on Justin's questions on the ROE target and clarify a couple of things. Is the simple math on that just pre-tax income over average equity for the whole Company or is this a leasing specific target or there some other adjustments. Can you help us with just how you get there.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Good morning Bascome. Yes, it is a consolidated Trinity number. So it's at the Trinity level and the simple math is, as you said, net-net income before taxes over an average equity. The one exclusion that we're making from the average equity is the AOCI, AOCL and we made the decision to exclude that since it's not an operating measure.

Bascome Majors -- Susquehanna -- Analyst

Okay, I appreciate that.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

The profit before tax over our average equity without the AOCI to AOCL.

Bascome Majors -- Susquehanna -- Analyst

I appreciate that. That's simple, and we can certainly replicated on our end.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

And Bascome, one more thing to consider, it's the minority interest remember, needs to be adjusted for Trinity 38% ownership in the partially owned fleet. So we make that adjustment as well.

Bascome Majors -- Susquehanna -- Analyst

We'll follow up a bit more on some of the details after the call.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Happy.

Bascome Majors -- Susquehanna -- Analyst

The last thing to get there in the 0.5 to get in that range over the next couple of years. Do you need to see lease renewals return positive, I know you don't want to give all of your modeling insensitivity assumptions, but does that have to happen to get there?

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

We have certainly modeled in profit before tax improvement over the planning period and that would be both from our lease rate expectations, as well as our delivery expectations. We've also mentioned that we're exploring additional services opportunities that would increase the recurring revenue of our platform. And these would be services related to our lease fleet and providing services related to the usage and ownership of railcars.

Bascome Majors -- Susquehanna -- Analyst

Thank you both for the time.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Our next question from Matt Brooklier with Buckingham Research. Please go ahead, your line is open.

Matthew Brooklier -- Buckingham Research -- Analyst

Yes. Thanks and good morning. So you talked about the cars that you passed on in the quarter from an order perspective that didn't meet your your return criteria. Can you talk about the types of equipment that are included in the orders that you did take in the quarter?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Sure, Matt, this is Eric. It's fairly broad basis, we mentioned already there is autorack orders in that business, there was also some obviously tank cars and plastics and other covered hoppers such as larger covered hoppers that serve the agriculture market. Fairly diverse both with lease leasing customers and sales to railroads and shippers.

Matthew Brooklier -- Buckingham Research -- Analyst

Okay and then Eric earlier in the call, you talk to your lease revenue, I'm assuming it's the revenue per car sequentially improving into the second half of this year. We know that lease rates for one of your competitors is kind of turning flattish right now. But I'm trying to get a sense for what's going to drive that improvement as we look into the second half, I'm assuming mix is a big part of that, but if you could give a little bit more color, I think that would be helpful.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Sure, Matt. You're right. Mix is a big impact. What I was describing is the average lease rate in our portfolio. So the three things that would directly impact that would be renewals and assignments of existing cars, and then the additions to the fleet minus any cars that we sell out of the fleet. And all of those measures, we expect will have a slight improvement on average lease rates when and you take all those in account. In terms of drilling down into the next layer of your question in terms of what we're seeing on renewals and an existing car front. We are seeing improvements or stabilization of lease rates. It's not across the board, we're seeing more car types with improvement sequentially than declines. We're seeing improvements in some freight car types and many tank car types, but not all. But generally speaking we're seeing flat to improvement an existing car rates and what we layer in a new cars will to help that as well.

Matthew Brooklier -- Buckingham Research -- Analyst

And then just my last question, you've talked about in the past, but one of the initiatives that you have on the lease side of your business is to in-source more and more of the maintenance on the lease fleet. You talked about getting to 50% number, could you talk about, and you may have, but what's the timeframe for servicing 50% of your lease fleet cars. Internally, what is it right now. And then if possible talk to maybe a sensitivity, how much savings maybe from a dollar perspective per car, do you think you achieve by servicing the maintenance side of your lease fleet cars in house and when should that start to trickle into the P&L?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Okay. Matt, this is Eric again, great question. And very detailed question. Well, I'll start with is, we're currently around a third of our maintenance isn't using our captive networks. The Iowa facility, we expect to come online in late 2020, so really you won't start seeing the benefits of that facility until 2021. And so that will take it there. Some of the benefits that we see in having our own network, there -- it's kind of threefold. First it's customer experience, we have a much more predictable throughput and on-time delivery, when we're using our captive network and that's important for our customers as they are planning in their business. Two, we think is a nice return from a maintenance standpoint of the investment in that network and that we're able to make a return on that work that's attractive. Some of that will flow through the Rail segment and some of that will flow through leasing. And then third is just more about availability of the cars better turn times all of that which will the leasing company benefits from better turn times and so all of those factors kind of come in. We have those benefits on the portion that we do now, and we see, we would see that benefit increasing as we capture more of the share that work internal.

Matthew Brooklier -- Buckingham Research -- Analyst

Thank for the time.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Thank you.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Take our next question from Allison Poliniak with Wells Fargo. Please go ahead, your line is open.

Allison Poliniak -- Wells Fargo -- Analyst

Hi guys, good morning. And going to follow up on Bascome and Justin's line of questioning on the return. I know you won't -- don't want to go into specifics of your Trinity assumption.But you obviously nothing mentioned that we're facing somewhat of uncertain macro, what kind of assumptions are you kind of baking in there. We sort of just flat here or is this more of a self-help story in terms of the invest investments that you guys are making?

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Good morning, Allison. It's Melendy, as I mentioned, we looked at several different scenarios, as we were setting the targets and certainly we stress tested those. We talked a lot today In our prepared comments about the integrated rail platform and its ability to grow and to deliver strong financial performance. Certainly, the market has an impact on what our performance can be. However, our goal is to stabilize our earnings and returns to have them be more steady through the cycles as a result of growing our lease fleet and adding services to our platform. So again, we looked at several different scenarios. We certainly stress tested those the 11% to 13% pretax ROE goal is -- it's going to be a stretch goal for us to accomplish.

And we are considering both financial and operational levers in looking at what actions we can take to achieve those goals, and we're confident.

Allison Poliniak -- Wells Fargo -- Analyst

Great. And then I think, Eric, you had mentioned a pause and that's certainly what we're hearing from the industrial world. But one of the industrial call today did note obviously a pause in June, but a pretty sharp snapback in July. And are you seeing that in the inquiry levels as well. That's giving you some confidence out there?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Allison, this is Eric. I think that's a fair assessment. We are the inquiry levels while we never went down, just the quality of the inquiries, we feel pretty confident. We have good line of sight in commercial activity this quarter and for the remainder of the year. So yeah, I do sense that snapback , as you call it.

Allison Poliniak -- Wells Fargo -- Analyst

Great. And then just that's on leasing utilization, it was certainly still high, but it did step down from the quarter, was that just sort of a timing issue. Any color there?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Leasing utilization about your question?

Allison Poliniak -- Wells Fargo -- Analyst

Yes.

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Yes, it did step down. We did have mainly to car types that really influence that. We're moving -- We have in the coal market. We're moving some cars from one customer in the other, we have an opportunity to improve rates unfortunately in the quarter, those, they were off lease, as we expect that to be temporary in nature. And we do have some small cube covered hoppers that came back this quarter. Obviously that markets a little more challenged. We do see that market, we think it's bottomed down and we are seeing slow improvement there but that impacted our utilization for the quarter.

Allison Poliniak -- Wells Fargo -- Analyst

Okay, great. Thank you.

Operator

We'll take our next question from Steve Barger with KeyBanc Capital. Please go ahead, your line is open.

Steve Barger -- KeyBanc Capital -- Analyst

Hey, good morning everybody.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Good morning.

Steve Barger -- KeyBanc Capital -- Analyst

You have talked a lot about how you're differentiated in you're pushing customers to understand that the integrated platform is not a commodity. But I'm just curious, what is the specific pitch to convince people to pay a premium price in a lower demand environment, when you have competitors that are willing to get more aggressive on price?

Timothy R. Wallace -- Chief Executive Officer and President

Well, this is Tim. When you have differentiated products. That have features on them that enhance the productivity of the user, a lot of times they'll pay for it, because and that's what our overall goal is, is to end up with features. And what Eric and I were describing earlier on this auto carrier that we have, it's a feature that is an out there in the marketplace. And we are able, when we have features to demonstrate to our customers. The value proposition that's associated with the feature and then they can put their pencil to it and then come back and they'll say, okay we see benefits, sometimes the benefits are tangible benefits, and sometimes the benefits our intangible benefits and the autorack that we were talking about is a matter of if there is a safety issue. As an example, when they're loading. I think it's pickup trucks on a autorack what they've had to do in the past is the loaders have had to take the rear window of the pickup truck out, and climb through it to be able to get inside of the car, I mean, inside of the truck to load it. With our autorack I think the feedback we've received is that they are able to go through the door and not go through the back rear window, right . And so this is, this is a good example of optimizing the usage of a railcar of and because the people that have received these railcars have sent back messages to it to us of the value that they are placing on that not just productivity but if you can imagine if your employees are out there climbing through the windows the back windows of pickup trucks on a day in day out basis. There is a higher probability for safety problems and things like that. On one of our tank cars on our tank cars we, we have a valve at the bottom of the car, and we extended the valve to where they can operate that valve on both sides of the car, where in the past that it was just set to be used on one because the handle wasn't there, but we, we did quite a bit of research in that particular area. It sounds like something simple but it really does get down to what we can do to load and unload a railcar efficiently. What we can design [Indecipherable]

Steve Barger -- KeyBanc Capital -- Analyst

So, I mean those are good examples. What percentage of your product offering do you think has a differentiated feature like that and have you considered making those only available via the lease fleet rather than just selling them to 3rd parties out in the market?

Timothy R. Wallace -- Chief Executive Officer and President

Like I said, we normally launch new product features and have done this for years through our leasing company because it gives us that connection with the usage of the railcar and we try to get that back.

Eric, you want to comment?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Yes, Steve, this is Eric. Let me just add a couple of things. [Indecipherable] one when you talk in customer terms at a high level, we're looking to solve their problems and we think in down markets and up markets especially in down markets customers are looking for a service alternative. That will create value for them. So we think it's it resonates with our customers. It will not resonate on product differentiation that resonate with all products and all customers but service certainly does in service differentiation whether we're dealing with railroads, industrial shippers or leasing customers, service differentiation does resonate with our customers.

Timothy R. Wallace -- Chief Executive Officer and President

And an example of a service that would be tied to a product is the flexibility of our production line...

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Absolutely.

Timothy R. Wallace -- Chief Executive Officer and President

and for customers to be able to come in at the last minute and request either space or request large capacity or request that we move and change something , and we like to think of ourselves as kind of like the old Ringling Brothers Barnum & Bailey Cirsus to where we have something going on and one circle and something else going on in the other circle and we're quick change artist. So our people thrive on that and Paul in the manufacturing people have done a great job, and then Brian in the leasing business has a lot of feedback coming back from customers. We were watching something the other day where customer said it was an internal piece that they said they like to do business with us for our Indian solutions that we provide them on their on their products. They said we'd like to just be able to come to Trinity leasing and tell them what our problem is and then they'll go and work. So we're also working towards having something that you would think of as kind of industrial [Indecipherale] service that any of our customers, and I mentioned to it earlier is like a club. Any of our customers that come to us with a problem or a challenge or an idea we want to be able to provide solutions and opportunities for them to improve the performance of their company by using our Rail Products.

Steve Barger -- KeyBanc Capital -- Analyst

Understood, that's great color. Thank you. And you've also talked about how in soft markets, you want to take a contrarian positioned to buy cars, it seems like new car pricing was soft in the quarter for some car types. Has that translated into you starting to see secondary deals that are attractive to you as a buyer or are there still more non-strategic buyers willing to pay a premium out there?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Hey, this is Eric. In terms of the secondary market, we are seeing a lot of portfolios being offered in the market. We are bidding on those. We also obviously we did some transactions in the second quarter, we are selling cars, not only to our already partners but into the third-party market. I would describe the market as still healthy, it's not as deep as it was say a year or two years ago. But it's still a relatively healthy market. We do think there will be opportunities, I think there are some of the new entrants that -- some of the bank money that's entered the market over the last decade. It's probably pausing on future investments and they'll probably make decisions on whether they want to sell or hold based on what they can do.

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Steve. This is Melendy, I mentioned in my comments that, based on the secondary market portfolios that we've seen in the valuations that we understand, those are going at -- we've dialed back our expectations of the number of those transactions that we would be successful in completing for the year.

Steve Barger -- KeyBanc Capital -- Analyst

Right.

Timothy R. Wallace -- Chief Executive Officer and President

Steve this is Tim. I'll respond just a little bit. So we also with our platform and the breadth of it and the bandwidth, so to speak, people do come to us, when they have railcars and they need to liquidate them in a hurry because we can make quick decisions. And we've been able to do that over the years, and so we're very opportunistic in that area. We're -- we may be seeing today, we're not liking the RFQs that we're receiving but we may end up having a customer come to us quickly because they need some liquidity. And we can help in that area.

Steve Barger -- KeyBanc Capital -- Analyst

Great. One more on just industry conditions. Eric, going back to your order and inquiry comments, based on what you see out there for fleet growth versus traffic levels or replacement requirements. Do you think 1Q industry orders which were just under 10,000 for the industry is the low point for the year or do you think it's possible as we go into the back half that we could have a print lower than that?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

So forecast in orders isn't something I'd like to do, but I would say that the levels that we're operating that in terms of industry orders are probably in line with replacement demand. We do see growth elements in the market, so not all the orders are replacement, but just the level of orders. I would say -- could characterize as replacement demand. We do see markets that we expect to grow over the next few years. So I would expect, take it -- I'll leave it at there.

Steve Barger -- KeyBanc Capital -- Analyst

So. And just, there's a lot of different definitions for replacement demand but does that suggest a 40,000-car market or something?

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

In round numbers, I think that's fair.

Steve Barger -- KeyBanc Capital -- Analyst

All right. And then one last one, Melendy you highlighted strong free cash flow generation as part of the integrated platform. But on prior calls, you've also talked about dramatically growing the size of the lease fleet, if that's organic, we're probably unlikely to see free cash flow in the near term. So just to be clear is the priority lease fleet growth or is it free cash generation?

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Yes. I appreciate the question and that's something -- that certainly a balance that we're working towards. And when I talk about strong free cash flow generation, we often think of that before our lease fleet growth because that lease fleet growth is -- it's market dependent because those are leases that -- those are cars that have a lease attached to them for our customers. So, to a large extent our lease fleet growth is going to be market-driven. Another way that we're looking at our free cash flow generation is, what is our discretionary free cash flow if we consider what do we have to invest in order to keep our earnings sources, cash flow sources running, what's left over after that discretionary. What is our discretionary cash flow after those investments. So those are a couple of different ways that we're looking at it and we certainly will provide some more detailed information for you in the future.

Steve Barger -- KeyBanc Capital -- Analyst

Understood. Thank you.

Operator

And there are no further questions on the line at this time, I'll turn the program back to Jessica Greiner for closing statements.

Jessica L. Greiner -- Vice President of Investor Relations & Communications

Thank you, David. That concludes today's conference call. A replay of today's call will be available after 1 o'clock Eastern Standard Time through midnight on August 1st, 2019. The access number is 402-220-7237. A replay of the webcast will also be available under the Events and Presentations page of our Investor Relations website located at www.trin.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Jessica L. Greiner -- Vice President of Investor Relations & Communications

Timothy R. Wallace -- Chief Executive Officer and President

Eric R. Marchetto -- Chief Commercial Officer, TrinityRail

Melendy E. Lovett -- Senior Vice President and Chief Financial Officer

Matthew Elkott -- Cowen -- Analyst

Justin Long -- Stephens -- Analyst

Bascome Majors -- Susquehanna -- Analyst

Matthew Brooklier -- Buckingham Research -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Steve Barger -- KeyBanc Capital -- Analyst

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